Money Matters

Rickety road

By Ihtasham Ul Haque
Mon, 07, 17


The unfortunate lengthening of shadows over the political horizon are continuously turning the tide against the struggling economy, forcing the Pakistan Muslim League-Nawaz (PML-N) government to base its policies on fears rather than facts, resulting in over reliance on internal and external borrowings. Under such depressing circumstances, the collection of the ambitious Rs4 trillion annual revenue target for the next financial year is anyone’s guess.

Those familiar with the current upsetting political developments say that future course of action, including paying any attention towards the falling economy, could only be seen once the Supreme Court has decided the Panama leaks case in the third week of July. By that time, they said, it would have also been revealed who would lead the government in case any decision was taken against the incumbent prime minister.

Questions are being asked as to why the country was in the grip of prolonged political uncertainty, which was leading towards more economic instability. Though the cabinet ministers and government functionaries have conceded that the government was not focused on improving the poor health of the economy, they blame the Pakistan Tehreek-e-Insaf (PTI). They claimed that Imran Khan-led PTI was indulging in poor political style, which was harming the economy for the past four years.

The continued fiscal and current account deficits are a real source of concern and hence the economy is standing on frail pillars. The situation cannot be improved without seeking new resource mobilisation that is unavailable for the last four odd decades or so.

Taxing and further taxing the people with more indirect taxes was neither taking the country anywhere in terms of reviving the economy and nor providing any relief to the common man, while the country’s businesses and industrial base remained unresponsive.

However, there is still hope, especially since the size of the economy has grown over $300 billion.

The government needs to come up with ways to generate more revenues and reduce the deficit that it is facing on all the fronts to avoid going to lenders again. The government can club dozens of taxes into maximum one or two taxes in Pakistan to generate enough resources with a view to providing the much needed relief to the people and the business community at large.

Currently there are 37 different local, provincial and federal taxes which also include income tax, general sales tax (GST), capital value tax, value added tax (VAT), Central sales tax, service tax, fuel adjustment charges, petrol levy, excise duty, customs duty, tax deduction at source (TDS), property tax, government stamp duty, aabiana (tax on water for agriculture land), ushr, zakat (deducted on money from banks), capital gains tax, water tax, withholding tax, wealth tax, professional tax, road tax, flood tax (which are no more there but you still have to pay), toll gate fee, securities transaction tax (STT), education cess, and super tax.

It happened almost in every government during the last many years that as a result of negotiations between the tax officials and the businessmen, it was decided that everyone will pay – small or big. But eventually everything was messed up, and it ended with further mistrust between the two, resulting in loss of revenue.

Federal finance minister Ishaq Dar met senior tax officials last week and was assured that the downwardly revised revenue collection target of Rs3.42 trillion, an increase of 17 percent against the actual target of 23 percent, will be achieved by the end of the current financial year. The government has been facing almost Rs200 billion revenue shortfall for the last three to four years. How would it achieve its ambitious and unattainable target of Rs4 trillion for 2017-18 is a big question, considering the declining local and foreign investment. The situation, coupled with growing political uncertainties that are refusing to disappear any time soon, are hence becoming a great hindrance in the path of tackling the ailing economy.

There is a consensus in the official and unofficial quarters that without overhauling the entire tax structure and tax administration, achieving initially double digit tax-to-GDP ratio and then attaining 16 to 17 percent ratio over the longer term would remain a pipe dream. It is said that civilian governments cannot accomplish this task because of their own vested and political interests and that it requires “political will” at the top to deliver in this behalf.

Former dictator general Pervez Musharraf achieved over 10 percent tax-to-GDP rate during his first two years that helped increase the annual revenue from Rs600 billion to Rs1,150 billion. But what happened then? He started making compromises to prolong his rule and stopped chairing lengthy regular meetings on economy during which he reportedly used to say, “We all are naive and idiots because we do not take care of the economy without which there is no politics, there is no defence and there is no diplomacy.”         

His main advisors were Tariq Aziz and lieutenant general (retd) Hamid Javed, later joined by Shaukat Aziz, who remained focused on political matters. In this whole process, the economy, instead of improving, was a major causality, as it did not get any more priority as it used to get.

Shaukat Aziz was very fine and worked hard to steer the economy out of the woods as long as he was the finance minister. The situation began to go sour when Musharraf took the decision to promote Aziz to the post of the prime minister. Once Aziz became the prime minister, like his boss, he did not have time to look after the economy and that turned out to be a disaster.

Initially Musharraf and Shaukat very rightly spent most of the time bringing about changes in the CBR and now FBR because they knew without adequate revenues, they would not succeed. But they too did not touch the agriculture sector to have access to increased resources. It was their political expediency that stopped them to bring the agriculture sector under a certain tax net. Some well-wishers, it is said, advised the then president and the prime minister to start taxing the agriculture income by amending the Constitution, which would have helped mobilise adequate resources, but they did not listen to them as it would have hurt their political interests.

Who does not know that agriculture still constitutes one-fifth of the national economy with nearly 60 percent share in exports, and that it provides means of living to roughly 43 percent of the labour force. Despite contributing one-fifth of GDP, agriculture accounted for less than one percent of provincial taxes and 0.09 percent of federal taxes in 2016. The subsidies in the agriculture sector outweighed the agriculture income tax by a factor of 24 in 2016, reflecting persistent fiscal indiscipline in Pakistan.

Question is why are the provinces failing to improve their fiscal position? Why cannot they introduce some fair and equitable system of direct taxes in agriculture especially for bigger landholders? Why is agriculture sector under taxed and over subsidised and disproportionately benefiting the country’s elite landed gentry?

Provinces hardly get Rs2 billion on account of tax on agriculture income, and all this is due to the collusion between the federation and its federating units over not imposing taxes on the feudal and bigger land owners, most of whom are also sitting in the assemblies. Whenever any move was made in the parliament to bring the agriculture sector in some formal tax net, the worst opponents of each other, mostly sitting in the Pakistan Peoples’ Party (PPP) and PML-N joined hands and scuttled the initiative.

The sad fact is that the country’s economy is on life support. International donors who are playing in the hands of western powers have liberally been giving waiver after waiver to bailout the political government. There had been a failure to reach out to the United States and European Union by the foreign office in the absence of any foreign minister.

It appears that nothing can be done unless the Supreme Court decides the fate of the prime minister and his family. It goes without saying that economy and politics go hand in hand and without tackling the growing uncertainty, there is no way to look after the economy which warrants serious attention of the rulers and the concerned government officials.

The writer is a senior journalist based in Islamabad